-->A Long Day's Journey Into Retirement Night

The Daily Reckoning

London, England

Wednesday, 19 November 2003

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*** The gift of prophecy...

*** Trade wars... the BED Spread converges...

*** 14,000 cops for the imperial visit... 'A republic, if
you can keep it'...

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We live in a nation of clairvoyants, dear reader.

"Yesterday, the Commerce Department reported that retail
sales were disappointing. The big chain stores are also
reporting lower-than-expected sales. People seem so
negative now..." said the Bloomberg interviewer,"with all
these corporate scandals and this lingering unemployment...
and now sluggish consumer spending... don't you think that
stocks will move up when people turn more optimistic and
become more confident?"

Just as people put on a bright face when they feel
worried... we would have said, if we'd thought of it... they
often put on a gloomy one when they feel most confident.

Not only have Americans rarely been more positive on the
future... they have never been so sure about it. Everyone
seems to think he knows what will happen... and most people
take action to make sure things turn out even better than
expected.

How else to explain buying stocks at today's high prices?
The danger is on the downside, a veteran investor might
say, simply because there is so much more of it. But
today's callow punters are not worried. They've looked into
the future; they know prices will go up, and they've bought
shares to take advantage of it.

How else to explain mortgaging your house... or running up
credit card bills? In a normal world, people are reluctant
to borrow and reticent to spend; they save money 'for a
rainy day' or 'just in case... '

But today's super-confident residents of Squanderville need
no savings; they've looked into the future. They know it
never rains. And they have no need of a cash reserve for
'just in case'; the cash comes along 'just in time' to make
the monthly payments, and that is all that matters.

The Wall Street Journal surveyed 53 economists. Squinting
to see tomorrow's Commerce Department reports, these
fellows could make out not only the headlines... but the
small print, too. GDP will grow by 4% this last quarter,
they said. Next year, in the first quarter, it will grow by
4.2%.

Meanwhile, the Soothsayer in Chief tells us that he may not
read today's newspapers; but he must read those of the
future! How else could he know what kind of world we would
have had if he had not taken action against Iraq when he
did? He would do it again, said he yesterday, because the
"safety of the world" depended on it.

And so does the safety of the world economic system depend
on a special trait of the U.S. Federal Reserve: its
mystical ability to pass through some sort of magic mirror
and stroll around in the future.

Of course, Fed governors could sit back and let lenders and
borrowers work out for themselves what rates to pay. But
that would betray a humble ignorance and remarkable
restraint. Fed governors love the world created by the
'free market,' but with their special talent for
foretelling the future, they believe they can create a
better one.

It is almost too marvelous to believe, isn't it? We mean,
that so many people have been given such a gift - a gift
not usually granted to humans - the gift of prophecy. What
a comfort it is to know that so many Americans are capable
of it.

Over to Addison with more news:

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Addison Wiggin in Paris...

- What's this... the day of reckoning so soon? We were just
getting used to toiling alone in despair over the bear
market rally.

- And then, last night, gold goes and does a head fake over
$400 in Asian trade... and traders feinted a run on the
dollar. The greenback skidded to an all-time low against
the euro at $1.20, if only briefly. Both moves were beaten
back... but for the first time, the critical resistance
points at $400 and $1.18 were crossed.

- Upon hearing the news this morning, your Parisian editors
suffered a wave of mortal fear for our benchmark Red Wine
indicator. And but for the Bank of Japan, we might have
seen our elixir spike to unimaginable highs of 10 dollars a
bottle!

-"Overnight, in the Tokyo session," writes Chuck Butler
over at the Everbank World Currency trading desk,"the Bank
of Japan stepped in and wrapped a tourniquet around the
dollar and stopped the bleeding, by buying [our] currency
and selling theirs. Yes, they intervened once more... The
BoJ buying of the dollar brought the dollar back to $1.19."

- Of course, we'd like to raise a glass to our friends at
the BoJ. But if this is a strategy they've developed to
help keep their trade balance in the black vis à vis the
U.S....we suspect they've got their work cut out for them.

- First of all, here's some big news we here at the Daily
Reckoning have been suspecting would arrive soon enough:
Foreign investors and central banks currently propping up
America's credit-bubble - and with it, the international
Dollar Standard itself - have begun to lose faith. Figures
released by the U.S. Treasury show net capital inflows to
the U.S. fell more than 91% in September, from $50bn in
August to $4.2bn.

- The government took a hit, too, as foreigners bought just
$5.6bn in Treasuries, down from $25.1bn the previous month.
Drew Matus, an economist with Lehman, states the obvious in
the FT:"It appears foreigners may have tired of U.S.
treasuries."

- The current account deficit that the U.S. sports with the
rest of the world requires foreigners to sink $1.5 billion
into the homeland every day. What happens when foreigners
decide not to sign the checks? Well... the dollar falls.
Fast. Hard.

- As if that weren't enough, we got word this morning that
the BED spread has converged below the 5% level. You'll
recall the BED spread is our colleague Dan Denning's
proprietary"doomsday clock"... measuring the riskiness of
U.S. government debt versus that of the emerging market
variety. Denning:"The yield on GVT (our basket of Uncle
Sam's debt) rose to 4.57% by Monday's close. At the same
time, the yield on EMD, our basket of emerging market debt,
fell to 9.21% for a spread of 4.64%. That's the narrowest
the spread has been since I began tracking it, and down 12%
in just two weeks.

-"It's bad enough," writes Denning, explaining the
implications of a converging BED spread,"that the Federal
government runs monstrous deficits. That's bad fiscal
policy. But as Richard Russell said in his remarks in New
Orleans, it's also immoral. To rack up enormous debts you
know you will never pay and to burden your children with
them isn't just lacking in foresight. It's selfish. It's
greedy. And it's the kind of thing to make foreigners look
at your currency like they would at spoiled meat."

- Adding even more fuel to the fire, the knuckleheads in
Washington appear to have declared trade wars on the rest
of the planet, in addition to the hot ones they're already
trying to finance. The ink isn't even dry on the WTO ruling
that declared George W. Bush's steel tariffs illegal - and
the U.S. has just shot off a few warning rounds to the
Chinese textile industry. The EU is threatening retaliation
against the U.S. by December 15th if the administration
doesn't revoke its steel tariffs.

- Lobbyists for the American Textile industry, which has
lost about 316,000 jobs since the"recovery" began, wants
to"put a lid on virtually all Chinese textiles," according
Reuters. One brain-dead senator has officially proposed a
27.3% tariff on all imports from China.

- Makes us wonder if they have history books inside the
beltway. A shapely White House intern wouldn't have to lick
her fingers and leaf too far back into the 20th century to
discover a similar instance... when another group of
numbskulls tried using tariffs to stave off the inevitable
after the last credit-goosed spending-binge went bad. It's
a certain little episode in history, which time sleuths
like to call: THE GREAT DEPRESSION! Oy.

- Despite it all, a Merrill Lynch survey of fund managers
reckons 78% expect the current U.S. 'recovery' to continue
into 2004, 58% reckon shares are at fair value, and 50%
think bonds over-priced. State Street's new index of
investor confidence is also bullish; it's up nearly 1% on
the month, at its highest level for a year. And a recent
poll of economists working for major U.S. brokerage houses
found that 100% of them expected rising share prices over
the next 12 months.

-"The real problem with fund managers isn't their
dishonesty," wrote Michael Lewis in Barron's yesterday,
"it's their incompetence." But the U.S. authorities
disagree. On Monday, Morgan Stanley had to agree to pay
$50m to settle an SEC investigation into its mutual fund
business.

- Yesterday, Securities and Exchange Commission chief
William Donaldson told Congress he may ban so-called
'market-timing,' whereby big institutions trade mutual fund
shares after-hours, costing the lumpeninvestoriat dear.

- The SEC also arrested 48 foreign exchange traders on
suspicion of fraud yesterday. It had the FBI drag them out
of their Wall Street offices in handcuffs. Today, it seems
to us, the problem neither institutional dishonesty nor
professional incompetence... it's that the lumps keep buying
at the top, and selling at the bottom.

-------------

Bill Bonner, back in London....

***"Is it overkill?" wondered the Daily Mail, with a bad
choice of words.

Half of London's police, 14,000 men, plus 250 armed secret
service agents, have the job of trying to make sure that
U.S. President George W. Bush survives his trip to
Britain's capital. A better headline, on our opinion, would
have been"Is it worth it?" There are no shortage of
candidates for America's top office. In short supply, on
the other hand, are police in London... and parking places,
most of which seem to have been eliminated in London's
drive to keep George W. Bush among the quick.

"Even mobile phones will be cut off," continues the Daily
Mail. Security agents are worried that mobile phone signals
could be used to set off a bomb.

Bush, say the protesters' signs, is Britain's most
unwelcome visitor in a long time. But at least he is not
likely to be arrested, as was Chile's former president
General Augusto Pinochet, for 'crimes against humanity.'

*** A note from friend Byron King:"This quotation is from
Benjamin Franklin, a Founding Father:

'Rather go to bed without dinner than to rise in debt.'
- Benjamin Franklin

"His roots were in an English-cultured Colonial America,
and he was truly an Anglophile. But later in his life, he
showed a fierce and abiding love for his native land. As he
was leaving Independence Hall at the conclusion of the
Constitutional Convention, he was asked by a passerby what
form of government the nation would have. He replied, 'A
republic, if you can keep it.'

"One of the finest modern historians, H.W. Brands, in a
biography published in 2000, considered his life and called
Benjamin Franklin 'The First American'. Today, the nation
reveres the memory of Benjamin Franklin by placing his face
on the $100.00 Federal Reserve Note, one of the most
commonly used debt instruments in the world. Go figure..."

***"It's so odd," we remarked to a friend,"the way the
English upper classes all seem to have some speech
impediment. Either they stammer, make some goofy expression
with their mouths, or some silly laugh."

"You see," our friend explained,"accents are so important
in Britain that making some gesture with your mouth is
extremely significant. The upper classes, having perfect
Oxbridge accents, feel the need to compensate. They are so
confident of their superiority that they give themselves a
handicap to prove it... like a guy who spots you a few
points when you go up against him in sports. No matter who
wins... he's the winner."

In nature, some of the fittest males give themselves a
handicap. Bright plumage on a bird, for example, signals to
the females that this guy can survive - even though he
stands out like a traffic accident. A more discreet animal
may have a survival edge... but lack a way to communicate
his genetic fitness to potential mates. We have even heard
of some animals that display their handicaps when pursued
by predators. Rather than dart to safety, some males
deliberately make a show of bravado in order to impress the
females.

In America, the rich have always handicapped themselves in
other ways. They play golf....buy expensive houses, fancy
cars... learn about French wines and cigars... and often even
get divorced so they can marry a 'trophy' wife. All of
these things cost time and money... effectively giving their
competitors a few points advantage.

But now, the whole nation seems to want to give itself a
huge handicap... buying things it doesn't need and cannot
afford with money it cannot earn and doesn't intend to pay
back.

Often, we note, the handicaps are a little too much. The
tycoon collapses under the weight of his acquisitions. The
colorful male bird ends up as some other male's meal. And
the upper-class Englishman sounds as if he is brain-
damaged.

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The Daily Reckoning PRESENTS: A DR Classique, originally
published on 24 July 2002. This essay inspired themes in
"The Hard Math of Demography," Chapter 7 of Financial
Reckoning Day

A LONG DAY'S JOURNEY INTO RETIREMENT NIGHT
By Bill Bonner


"I've lost faith in the whole darn market."

- Investor hoping to pull herself out of the labor pool,
someday, quoted in Money


Three little numbers at the end of the world:

1. Average age of American baby boomers on January 1,
2001: 46.
2. Average amount in retirement plan: $50,000.
3. Number of years at 6% growth to reach comfortable
retirement income: 63.

But wait, there's one more number that may be important:

4. Amount of money in U.S. Social Security Trust
Fund: $0.

We do not believe in crunching numbers here at the Daily
Reckoning. Nor do we flatten them, twist them, inflate
them or torture them into more appealing shapes. We just
take them as they are, however disagreeable.

Painting by the numbers above produces no great work of
art... but a monstrous futuristic tableau. Something Goya
might have done on a bad day... or Andre Serano on a good
one. For the scene is much the same all over the Western
world, whether you look at France or Canada or Italy -
with regional differences, more and more people are
getting older and older.

In this sense, Japan is part of the picture, too... with
one important difference: its people are about 10 years
older than those of most Western nations.

So, we wonder, what happens when whole populations get
old? We look to Japan for an answer... and don't like
what we see. And then we remember something worse: the
average Japanese householder never invested heavily in
stocks... and never stopped saving. The picture in the
U.S. over the next 12 years may be even uglier.

"How capitalism ruins small shareholders," reads the
headline of a popular magazine in France. The leftist
press, like jackals spying a crippled deer, is enjoying
the market's decline. We didn't read the article, but we
can give you an answer.

The investment industry - analysts, brokers,
underwriters, Fed chairmen - encourage investors to
believe that they can get rich without working for the
money. They don't even have to do serious stock research
- it's enough to be"in the market, in stocks all the
time." Stocks always go up over the long run, they are
told. You can't beat a diversified portfolio of growth
stocks, they hear. Alan Greenspan and the best business
managers money can buy will make sure the economy keeps
growing, they believe.

The smart money knows better. As the boom peaks out,
they are selling stocks, not buying them. A few months
ago, for example, insiders were selling 4 times as many
stocks as they were buying.

The whole process is designed by nature to separate the
patsies from their money. Capitalism is a jungle, after
all. The weak perish and life goes on. At the peak of the
bubble, the smart insiders sold off their holdings of techs
and telecoms. Like Buffett, they left their money in only
the strongest companies... and in bonds, real estate, gold
and other holdings. Then, when the lie is finally
discovered... the little guys drown in the swamp... while the
smart money, high and dry, prepares for the next deception.

We have no quarrel with this. We see nothing to
investigate, for it is the way of the world...

Back in the '90s, when all good things seemed not just
possible, but inevitable, a man could imagine himself
retiring young. He didn't need to crunch numbers, he just
had to tote them up. At 18% per year compounded growth in
common shares - a 47-year-old with $100,000 in a 401K could
see himself retiring at age 59 with a $1 million retirement
account.

With so much imaginary wealth coming his way, he saw no
reason to hold back on the little real spending power he
actually had. Rather than save, he spent. This spending -
multiplied over millions of consumers - had a remarkable
effect; the whole economy was soon flooded with credit,
SUVs and retail outlets. In fact, the nature of the economy
changed, too. Like a decent woman from the East who came to
Paris and became a hooker... the money was too good to turn
down. The easy money corrupted her... and then - if you
believe the press reports, for we have no independent
information on the subject - life turned hard.

As consumption increased, Americans imported more and more
goods from the rest of the world - resulting in the biggest
trade imbalance ever recorded. Savings that might have been
used to build factories and equipment disappeared. Net
national savings headed into negative territory in the late
'90s, according to Dr. Kurt Richebächer, for the first time
since the Great Depression of the 1930s.

"National savings in total have been squandered to pay for
spending that the consumer cannot afford from his current
income," Dr. Richebächer explains.

Now, the poor, hapless patsy is, say, 5 years older... and
his $100,000 is still just $100,000 - if he's lucky. He has
more debt, little in savings... and, it seems everyone
agrees, he can only expect around 6% growth from his stocks
for the next 5-10 years. Buffett says it might be 7%. Bill
Gross says it should be about 6%. Jeremy Grantham told
Barron's that investors should expect only 5%.

"At this point," explains an article in Money,"7% is a
more reasonable expected annual rate of return to plug into
retirement calculations."

But what if he turned a little Japanese in the coming
years? What if he figured he could not wait 63 more years
to build his nest egg? What if he decided to cut back on
his spending... pay down his debts... and add to his savings?

Imagine the disappointment of the poor Chinaman... laboring
on some gee-gaw in an unheated factory... for the benefit of
an American consumer, who quite suddenly seems not to want
to buy it. Imagine the desperation of the poor sweatshop
seamstress in Bangladesh. Or the assembly-line worker at
the Nissan plant in Nagasaki. What happens to the world
economy when the buyers-of-last-resort - the Americans -
stop buying? What happens to corporate profits when their
products stop selling? What happens to consumer prices when
consumers stop consuming? And what happens if stocks do not
bottom out in the next few months... and then do not begin a
slow recovery - 5%-7% per year - as everyone expects? What
if the NY Dow tracks its Tokyo cousin and closes at 2,700
in the year 2012?

In short, what happens to the world economy when aging
baby boomers start to act as if they were growing old?


Your correspondent,

Bill Bonner